All in the Family: Succession Planning

Family owned banks make plans for the inevitable change in leadership.It can be easy to disregard time's perpetual march forward. Bankers who would like to keep the bank in the family, however, cannot forget that one day a new generation will need to take over. Without careful planning, the older generation is likely to be left with limited options such as selling the bank or delegating management to non-family members..There's no blueprint for family bank succession. Still, family bank owners are finding best practices to raise up new leaders..Preparing for a leadership change.The Vogel family has owned New Market Bank in Elko-New Market, Minn., for three generations. The family just completed a leadership transition in 2014 with Anita Vogel-Drentlaw taking over the president's responsibilities from her father, Bob Vogel. While Bob Vogel retains majority ownership for now, Anita Vogel and her sister Karen Vogel-Ramola, a branch manager for the bank, are set to become the fourth generation to own and operate the bank..For the Vogel family, discussions about leadership succession began in 2002. By then, New Market Bank had $49 million in assets and three locations. When Vogel bought controlling interest from his father in 1981, the $4 million bank had only a single location. "Succession wasn't going to be the same as it was from Dad to me," Vogel said. "I wanted a well-thought-out plan.".In 2002, Vogel decided he wanted to do more than select an heir. Inspired by University of St. Thomas professor Glenn Ayres, the family banking consultant who later helped Vogel found the Independent Community Bankers of Minnesota's Family Held Bank Institute, Vogel set about establishing a plan for a well-run bank, no matter who sat in the president's chair.."One concept I took away from the St. Thomas class was that a family business is more than just a family activity," Vogel said. "You have to look at yourself like you're a publicly traded company which doesn't necessarily care if it has a fourth-generation family president. All that matters is that the bank is run right.".The strength of the bank's board became the centerpiece for Vogel's succession plan. "A truly independent, fiduciary board meant I relinquished some of my control," he said. "In a public company, as an owner you defer to the board. We wanted to respect the board in that same way. If I, or other members of the family, get away from objectivity, the board needs to be able to address the issue.".In New Market Bank's governance model there are three parties: bank management, the board and the family council. For now the family council has six members consisting of Bob, Anita and Karen Vogel with their spouses. The board is set up to have eight members, three are family members, and five are outside directors. "Regulators always have pushed for more outside directors than inside directors. I could satisfy them by bringing in outside directors who are really golf buddies that will rubber stamp my decisions," Vogel said, "but the people we added were chosen for corporate governance. They weren't even customers of the bank." .Vogel also wanted an independent board to remove as much nepotism as possible from the bank. The place for family discussions is in the quarterly meetings of the family council. "We created a family council to deal with our inter-personal dynamics, in regard to owning the bank, outside of the operation of the bank and the bank's board," Karen Vogel said. "While we could discuss who should lead the bank in the family council, we wanted a board strong enough to decide if a family member had the skill set needed to be president.".Two daughters, one chair.For many family banks, with the younger generation moving to metropolitan centers, the challenge is finding ways to attract a successor home. When Vogel started planning for a leadership transition, he had an unusual problem. Both his daughters were interested in working at the bank and becoming president. They weren't going to be able to take turns sitting in their father's chair as they had when they were young..Anita Vogel, who is a certified public accountant, came to the bank in 2002, after two years working in Minneapolis for McGladrey's financial institutions group. Karen Vogel worked for two years at another bank before coming to New Market Bank in 2005. She has a bachelor's degree in entrepreneurship..The family council, which was formed in 2004, proved an important part of both daughters' discernment process. While Anita Vogel already had discerned that the best career for her involved accounting skills, Karen Vogel hadn't decided what she wanted to do. "I think everyone is attracted to leading an organization but only certain people can enjoy administration, HR and compliance challenges," Karen Vogel said. "I worked with a leadership coach who helped me realize I didn't want to be president because it wasn't a good fit for me. My passion is for sales.".Now, with both Vogel sisters taking their respective leadership positions in the bank, Vogel has decided to try his hand at politics. In November, he won a seat in the Minnesota House of Representatives..Vogel said he encourages other family banks to dig into their succession plans to achieve the best result. "If you have the accounting and the legal forms done, that's not a transition strategy," he said. "If the next generation wants to come in, then take the time to set the bank up for success.".Estate planning.Rather than selling the bank to his successors, Vogel plans to include his children, and eventually his grandchildren, in ownership of the bank. "I did not want to weaken the bank by requiring Anita and Karen to borrow money to buy me out," he said. "The income I receive as an owner will be sufficient for my purposes.".Bankers who plan to cash out of their bank by selling it to the next generation need to make it known as soon as possible, said Phil Smith, partner at Gerrish McCreary Smith, a community bank consulting firm based in Memphis, Tenn. "The need for cash from the retiring generation is a common reason for banks to be sold to a buyer outside the family," he said. "Someone needs to ask the questions early about where mom and dad's retirement income will come from.".Smith said he often has seen bankers choose to live off dividend income and eventually pass on ownership through a gift or sale of their stock to the next generation over time..Seasoning a successor.Bankers eyeing retirement will want to start a leadership succession process as soon as possible. Smith estimated it takes at least five years to complete a transition..Getting the candidate into one of the graduate schools of banking is a good start, Smith said, but they also need mentors. "The advantage of a family bank is that employees understand the new generation of owners needs to be trained," he said. "You can really put the candidate in every department so they learn the bank through and through.".Candidates should be given firsthand experience of their future job, Smith said. They should be asked to make business decisions and to carry out some of the more uncomfortable jobs belonging to family management. "In one case, a bank I worked with needed to fire an employee; the current generation forced the up-and-comer to do it," he said. "It can feel brutal but they need to know what they are getting into. They also need to be able to do it, if they become president.".Hands-on learning was the name of the game for Jim Kennedy Jr., who took over as president of the family's two-bank holding company, Fidelity Company in Dubuque, Iowa, from his father in 2014. The company has 22 locations and $700 million in assets. "Dad's approach was learning by immersion," he said with a laugh..The second youngest of six siblings, Kennedy is the only member of his generation working in the bank. "Dad never told any of us that we had to work here. He encouraged us to look into our interests," said Kennedy, who earned a biology degree to go into medicine before deciding to work for the holding company in 1998..Kennedy's only title was "Dad's assistant." In the Kennedy family, a lot is expected of an assistant. "Dad started feeding me decisions pretty early on," he said. "He had a surgery that took him out of the bank when we had an acquisition negotiation going. Dad asked me to negotiate the deal to a letter of intent on my own. I had been with the company for two years and was 25 years old.."I succeeded in bringing the deal to a letter of intent," Kennedy continued. .Kennedy's father depended on him to build Fidelity Company's staff to support its subsidiary banks. Since then he has hired a CFO, an auditor and moved the IT and HR functions into the holding company. Early on, Kennedy was asked to conduct annual reviews with the bank's various presidents. "I had to talk to them about compensation for the year," he said. "That can be an uncomfortable topic.".Kennedy's responsibilities for day-to-day management slowly increased over the years. Now his father is retired and he is chairman of the holding company board and of the banks' boards. He is the only family member working in the company day-to-day. He also is the only family member on the company's three boards. "I couldn't have grown as I did without Dad," Kennedy said. "He mentored me closely for about four years. I learned banking from him.".Plan without tying them down.When it comes to talking with the next generation about working in the bank, Steve Eager talks honestly about the need for family to manage the bank while also not pressuring the next generation to work for the bank. Eager, a fourth-generation banker, became president and CEO of the $210 million Union Bank & Trust Company, Evansville, Wis., in 2013.."Dad always encouraged us to be absolutely certain we really wanted to be in the bank," he said. "I take the same approach. I do, however, make my kids aware that it will affect the bank if they all seek careers elsewhere.".Eager said he is honest with his children about the challenges facing banking. "I really do still tell my kids this is a good business to be in," he said. "We have been able to grow our bank enough to handle a few more people. If I were still in a small bank where the president has to wear a lot of hats, I am not sure I could tell my kids there is any fun to be had in this business.".Jill Kollock, who became the third generation president of Bancroft State Bank in Bancroft, Wis., in 2005, also makes sure her children feel they can pursue their desired career. In her case, her children are not interested in working in the bank at this time..Yet, while leadership at the Bancroft State Bank discerns its next family successor, Kollock hasn't put succession planning on hold. The bank has named a non-family successor should anything happen to Kollock. "I know I am mortal," Kollock said. "That's why we do succession planning. The bank needs to run in case something happens to me.".Businesses can be well runwithout a family president.Editor's note: NorthWestern Financial Review reporter Matthew Doffing sat down with Dr. Deb Houden to talk about family succession strategies employed by family businesses in other industries. Houden is a former director of the Family Business Center at the University of Wisconsin, Madison, and a consultant with The Family Business Consulting Group, Chicago..Q. When a family-owned business has no family successor, do families in other businesses see it as a foregone conclusion that they must sell? .You would be surprised at the number of family businesses, some even in the third generation, which are managed by non-family. It is a foreign concept to have someone else run your business. Commonly, owners think that nonfamily wouldn't care as much as they do. They also often think that any person who cared enough to run it well would want an ownership stake. Our research has shown that there are people who will run it well without an ownership stake. Also, there are options like phantom stock that owners can use in place of equity. .Q. Can you share any general business succession planning tactics that could be helpful to banks? .A business I am working with right now has chosen to create an advisory board comprised of seven members with five votes. Three siblings are required to cast one vote together. The first generation in the business is using this board structure to train the siblings to find consensus..Another tip: The things that have worked for previous generations may not work for the next. A best practice for family business is that you must continually revisit the practices of the business. Part of that process is having a good fiduciary board. It is not necessarily a problem for directors to be the owner's golf buddies, so long as they truly are good board members. You want independent thinking on the board. Sometimes friends of the owner can be better at challenging the status quo..Unity and family ownership are two competitive advantages family businesses have over other businesses. It is important for a family to continue to bring those advantages to their business. Family councils also are a good tool to safeguard the unity of the family and to ensure differences of opinion within the family do not result in the sale of the company..Q. Which do businesses generally favor more when preparing up-and-comers for management: schooling or real world experience? .For the president's chair you will typically need higher education and potentially an MBA. An MBA isn't just about the book learning. MBA graduates walk away with business contacts. The MBA also helps a candidate gain the confidence of bank employees that the candidate can do the job. No one wants to be "the boss's kid.".Going away from the family to prove yourself is a way to gain new ideas. It also is a way to gain the confidence of the elder generation. People tend to respect someone with experience more because the candidate has shown they can achieve on their own.